Part 5. Collecting Process

Chapter 7. Trust Fund Compliance

Section 2. Monthly Filing and Special Deposits

5.7.2  Monthly Filing and Special Deposits

5.7.2.1 Letter 903 (DO)
5.7.2.2 Monthly Filing and Special Deposit Procedures
5.7.2.3
5.7.2.4 Processing of BAL DUE Cases
5.7.2.5 Referrals For Civil Enforcement
5.7.2.6 Referrals For Criminal Enforcement
5.7.2.7 Cancellation of I.R.C. § 7512(b) Requirements

5.7.2.1  (06-04-2002)
Letter 903 (DO)

1. Letter 903 (DO) alerts taxpayers to the provisions of I.R.C. § 7512, Separate Accounting for Certain Collected Taxes and I.R.C. § 7215, Offenses With Respect to Collected Taxes.

   Note:

   These procedures should only be used in the most egregious cases of noncompliance and where the collection procedures have already been unproductive or would be futile to stop or reduce trust fund pyramiding.

2. After issuance of Letter 903(DO), subsequent delinquencies by the taxpayer will be accelerated to the field for prompt enforcement action.

3. Issuance of Letter 903(DO) is required before a taxpayer can be recommended for monthly filing and special bank deposits.

4. Issuing Letter 903 (DO):

   If	Then
   The taxpayer is a in-business trust fund violator.	Consider issuing Letter 903(DO).
   You believe a levy upon property of the business or its responsible persons would be ineffective to reduce pyramiding behavior.	Timely consideration of Letter 903(DO) procedures is important. (See IRM 5.10.3.4)
   You are recommending issuance of Letter 903(DO)	Submit the case file and letter with one copy to the group manager for review and approval.
   The manager does not approve the recommendation	Note the reason in the case file.

5. When the Letter 903(DO) is approved:

   1. Hand deliver Letter 903(DO) and Notice 931, Deposit Requirements for Employment Taxes, to the taxpayer. If the taxpayer is not available, the letter and notice may be left at the place of business.

   2. Prepare Form 4844, Request for Terminal Action, to request input of TC 148–9. This provides for systemic control and subsequent follow-up. If a subsequent BAL DUE, DEL RET, or FTD Alert, is issued it will be coded with an "L" and it will be accelerated.

   3. Associate the copy of Letter 903(DO) with the case file.

      Note:

      The basis for the $100,000 figure used in the Letter 903(DO) is as follows:

      • I.R.C. § 7215 violations are punishable by up to one year of imprisonment;

      • Under federal sentencing guidelines, offenses punishable by one year or less, but more than six months are Class A misdemeanors (18 U.S.C.§ 3559(a)(6));

      • Under federal sentencing guidelines, Class A misdemeanors not resulting in death are punishable against individuals by fines of not more than $100,000 (18 U.S.C. § 3571(b)(5)).

6. If the taxpayer has previously abandoned other business ventures, leaving unpaid and uncollectible tax liabilities, it may not be necessary or appropriate to place the taxpayer on monthly filing or special deposit requirements before seeking a civil injunction to stop further pyramiding. Consult with local Counsel when dealing with this situation.

5.7.2.1.1  (06-04-2002)
Revenue Officer Follow-up After Letter 903(DO) Issuance

1. For cases received in the Collection Field function coded "L" indicating that the taxpayer previously was issued Letter 903(DO), take firmer actions, as described below.

   • If the taxpayer is not in compliance with filing and payment requirements, place the taxpayer on both:

     1. Monthly filing (See Treas. Reg. 31.6011(a)–5)

     2. Special bank deposit requirements (See I.R.C. § 7512)

   • The case should be monitored for ongoing compliance. The revenue officer should make a documented contact with the taxpayer at least once each month to remind the taxpayer of trust fund obligations.

2. Document the case history with the reason for not proceeding with any or all of the above.

3. If the taxpayer is in compliance, request input of TC 149 to reverse the TC 148–9.

5.7.2.2  (06-04-2002)
Monthly Filing and Special Deposit Procedures

1. All administrative collection procedures should be taken before initiating Trust Fund Compliance procedures. For instance, appropriate levies and liens should first have been considered and appropriate trust fund recovery penalty investigations should have been pursued. With approval from local counsel, it may also be appropriate to use monthly filing and special deposit procedures while a taxpayer is exercising its collection due process hearing and appeal rights under I.R.C. § 6320 or 6330.

2. Form 2674, Report of Trust Fund Violators, is used to recommend the number of months the taxpayer must file monthly or semimonthly. The taxpayer will remain on a monthly or semimonthly filing schedule for six months unless it is determined a longer period is appropriate.

3. If the taxpayer is required to file Form 941–M, a return must be filed for each month in the quarter. If the taxpayer is required to file Form 720, recommend monthly or semimonthly filing based on the taxpayer’s Federal tax deposit requirements.

   Example:

   If the taxpayer is required to make semimonthly tax deposits with Form 720, recommend semimonthly filing.

4. If you are recommending a monthly return, you will:

   1. Complete a Form 2674.

   2. Prepare a notification letter to the taxpayer. (See Exhibit 5.7.2–1 Letter 1608(P)).

   3. Submit the Form 2674 and notification letter to the group manager for approval.

   4. Retain a copy of the letter in the case file.

   5. Deliver the notification letter to the taxpayer personally.

   6. Request acknowledgment of receipt of the original letter; if the taxpayer declines to acknowledge receipt, leave the letter with the taxpayer.

   7. Give the taxpayer Form 941–M and/or Form 720, with your mailing address for filing the returns.

   8. Explain monthly and/or semimonthly filing requirements.

      Note:

      Begin the period covered by the first monthly or semi-monthly return on the first day of the first month of the calendar quarter.

   9. Explain Special Deposit of Taxes requirements and issuance of Form 2481. (See IRM 5.7.2.2.3).

5. Inform the taxpayer that failure to comply may result in:

   • Prompt assessment of unpaid monthly liabilities.

   • Assessment of monthly liabilities based upon a return executed under I.R.C. § 6020(b).

   • Prompt enforcement action prior to the end of the calendar quarter.

   • More stringent requirements authorized by I.R.C. § 7512(b), and possible civil or criminal referral.

6. Change the taxpayer’s Form 941 filing requirement from 1 to 10. Request input TC–136 to suppress FTD Alerts, if not previously done.

7. I.R.C. § 7512(b) applies to withheld employment taxes, backup withholding, and certain withheld and collected excise taxes (i.e., local telephone service, toll telephone service, teletypewriter exchange service, and air transportation). It requires the creation of a separate bank account and deposit therein of such taxes. Deposits to the separate bank account are paid over the government when a return for the deposit period is due, instead of through the FTD system, which is one reason that monthly or semi-monthly return requirements are ordinarily established at the same time that I.R.C.§ 7512 requirements are imposed.

8. Failure to comply with provisions of I.R.C. § 7512(b) subjects the taxpayer to criminal prosecution under I.R.C. § 7215.

   • Pursue cases that do not meet LEM 5, Section 4.1.(2) criteria (or where criminal prosecution will otherwise not be sought) for a potential civil injunction.

   • Form 2674, Section II, provides for revenue officer recommendation for issuance of Form 2481 under civil or criminal sanctions.

5.7.2.2.1  (06-04-2002)
Monitoring Compliance with Monthly Filing

1. When monitoring taxpayer compliance, ensure:

   • Form 941–M and/or Form 720, with return envelope, is mailed to monthly filers between the 25th and 28th of each month.

   • Form 720 is mailed to semimonthly filers between 10 and 12 days before the due date of the return.

   • Form 940 is sent with the Form 941–M between the 25th and 28th of December.

2. Upon receipt from the taxpayer of the completed form, you will:

   • Review the return for accuracy and compliance with deposit and paying requirements.

   • Ensure that a received date is present on the return.

   • Use Form 2482, Record of Trust Fund Compliance Program Case, sections I and III, to monitor Special Deposit of Taxes and filing compliance.

   • Retain the case in active inventory for a full filing quarterly period. Thereafter, local management may determine other appropriate means of monitoring such cases.

     Note:

     If the taxpayer has moved after receipt of the notification letter, then issue a Courtesy Investigation to monitor compliance.

5.7.2.2.2  (06-04-2002)
Processing Monthly Forms 941–M and/or Monthly or Semimonthly Forms 720

1. To process the Forms 941–M and/or Form 720 follow the procedures below:

   If Collection of the tax	Then
   is not at risk	1. Associate all returns for the three months of the quarter.
   	2. Prepare a composite Form 941 or Form 720 no later than the end of the month following the close of the quarter.
   	3. Annotate the lower right hand corner of the Form 941–M and or Form 720 with the eight digit employee number.
   	4. Attach all Forms 941–M or 720 to the composite quarterly return.
   	5. Process routinely. See IRM 5.1.11, Delinquent Return Accounts.
   is at risk	1. Prompt assess any monthly or semimonthly returns for that same quarter to avoid duplicate assessments.
   	2. Prepare Form 2859, Request for Quick or Prompt Assessment, with appropriate penalties and interest.
   	3. Attach returns to corresponding Form 2859 and process.
   	4. Retain photocopies in the file of all returns to be prompt assessed.
   	5. Annotate the lower right hand corner of Form 941–M and/or 720 with the eight digit employee number.

   Reminder:

   If the first month’s return for the quarter was not prompt assessed, but the second month's return will be prompt assessed, combine both returns on one Form 2859 and process. The third month's return for that quarter must also be prompt assessed on a separate Form 2859 with a note under "remarks" to the service center to associate this return with months 1 and 2 for that quarter.

2. If the returns are received by another office, the receiving office will:

   1. Complete a Form 2482 showing the taxpayer's name, address, type of return, period covered, date received, amount required to be paid under I.R.C. § 7512(b), and the amount paid.

   2. Clearly mark Form 2482 “Return Received by (indicate office)” and

   3. Promptly forward it to the proper office so the information may be recorded on the taxpayer's control record.

3. When removing a taxpayer from Monthly filing requirements (Form 941–M), do the following:

   1. Ensure the release coincides with the end of the calendar quarter.

   2. Prepare a letter to the taxpayer rescinding monthly filing requirements. See Exhibit 5.7.2–2, Letter 2216(P)).

   3. Submit the letter to the group manager for signature approval.

   4. Send the letter to the taxpayer by regular mail.

   5. Update the taxpayer’s filing requirement from 10 to 1.

   6. Request input TC 137 for future FTD Alert issuance.

   7. Request input of TC 149 to reverse the TC 148–9.

5.7.2.2.3  (06-04-2002)
Approval and Issuance of Form 2481

1. The Compliance Area Director is authorized by Treasury Regulation 301.7512–1 to:

   • Require a taxpayer to comply with the provisions of I.R.C. § 7512(b).

   • Relieve a taxpayer from compliance with I.R.C. § 7512(b).

2. A Compliance Territory Manager has the authority to approve and issue Form 2481 cases which meet the following criteria:

   • Provisions of LEM 5, Section 4.1.(2), are met.

   • Criminal prosecution of the taxpayer is contemplated if the taxpayer does not comply.

   • The Compliance Territory Manager and the Criminal Investigation (CI) Special Agent in Charge are in agreement.

3. Revenue officer group managers approve and issue Form 2481 in cases which do not meet the criteria of Lem 5, Section 4.1.(2)a, and where no criminal prosecution of the taxpayer is contemplated.

4. The Compliance Territory Manager has the authority to relieve a taxpayer from compliance with I.R.C. § 7512(b) where potential criminal prosecution was contemplated if the taxpayer had failed to comply, while group managers have that authority when a potential civil injunction was contemplated if the taxpayer had failed to comply.

5. Follow the procedures below for approval and issuance of the forms.

   If	Then
   The taxpayer is pyramiding trust fund taxes, and the seizure of the business would not yield net proceeds	Use I.R.C. § 7512(b) procedures before pursuing an injunction against the taxpayer under I.R.C. § 7402(a).
   	1. Prepare Form 2674 and Form 2481.
   	2. Submit forms and any related documents to the group manager for review and final approval of strickly civil cases.
   The criteria in LEM 5, Section 4.1.(2) are met and criminal sanctions are contemplated.	1. Follow steps 1 and 2 above.
   	Note: The Compliance Territory Manager and the CI Special Agent in Charge will jointly review the case, and if all criteria are met, will sign Form 2674.
   The Compliance Territory Manager and the CI Special Agent in Charge cannot reach agreement on whether to issue Form 2481.	The matter will be referred to the Compliance Area Director and Director, Field Operations Criminal Investigation for resolution.
   A recommendation to issue Form 2481 is disapproved by the Compliance Area Director and Director, Field Operations.	The Compliance Area Director and Director, Field Operations will notate the Form 2674 and return it through channels to the originating revenue officer for association with the case file.
   The Compliance Area Director and Director, Field Operations approve the recommendations that a notice be issued, he/she will sign Form 2674 and both copies of Form 2481.	The approved forms will be returned through the group manager to the originating revenue officer.

6. After approval:

   1. Hand deliver the Form 2481 to the taxpayer per I.R.C. § 7512(a)(2).

   2. Request an acknowledged receipt of the original notice in the blank space below the "Certificate of Delivery" on the reverse of the duplicate Form 2481.

      Note:

      An acknowledgment, although desirable, is not essential to the validity of the document. If the person declines to acknowledge receipt of the notice, leave the original with him/her.

   3. Request the taxpayer to insert the following: "Receipt of original acknowledged" followed by signature, title, and date.

   4. Complete the "Certificate of Delivery" on the reverse of duplicate Form 2481, regardless of whether an acknowledgment is secured, and retain it with the case file.

   5. Explain the provisions of the notice so the taxpayer will fully understand the requirement which must be met.

   6. Update the information previously recorded on Form 2482.

   7. Advise the taxpayer that failure to comply with special deposit requirements could subject him/her to civil and criminal procedures.

   8. Obtain the name of the bank where the taxpayer intends to open the special trust account.

   9. Request a copy of the bank signature cards after the account is opened, for association with the case file.

5.7.2.2.4  (06-04-2002)
I.R.C. § 7512 Case Control

1. Revenue officers will monitor taxpayer compliance on Form 2482. The following actions should be recorded on Form 2482:

   1. Due date for first monthly return.

   2. Date Form 2481 was delivered and to whom.

   3. Fact of mailing required returns.

   4. Fact of filing and paying in accordance with Form 2481
      requirements.

2. On Form 4844, Request for Terminal Action, request that the taxpayer’s filing requirement for Form 941 and/or Form 720 be changed from FRC "1" to "9" or "10" (criminal or civil filers, respectively).

3. Request input of TC 136, if not already input, to suppress FTD Alerts, when the taxpayer’s quarterly liability meets the dollar criterion for alert issuance.

4. If the taxpayer moves, issue a Courtesy Investigation to monitor compliance.

5.7.2.2.5  (06-04-2002)
Monitoring Compliance With 2481 Requirements

1. Monitor taxpayer compliance with the provisions of I.R.C. § 7512(b) for both civil and criminal filers by taking the following actions:

   • Verify on the dates specified in LEM 5, Section 4.1.(5) the following:

     1. Special trust account was opened.

     2. Trust funds deposited were in the correct amounts, as verified through payroll records, and were deposited within two banking days following their collection or withholding.

     Note:

     If verification by field visitation cannot be made on the dates specified in LEM 5, Section 4.1.(5), you and your group manager will confer to determine the earliest possible date thereafter when taxpayer contact can be made.

   • Monitor the taxpayer at least monthly to verify that:

     1. Special deposits continue to be made on a timely basis and in the correct amounts.

     2. Trust funds remain in the special trust account until payment with Form 941–M or Form 720

2. Minimize the time spent monitoring compliance by requesting taxpayers to provide copies of deposit receipt slips.

   Note:

   Although Form 2481 demands full payment of the taxes shown to be due on the monthly and semimonthly returns, I.R.C. § 7512(b) requires the taxpayer to deposit only withheld or collected taxes.

3. To determine partial or insufficient payments:

   If	Then
   A monthly or semimonthly return is received accompanied by a partial remittance.	The amount to be entered in the "Amount Due" column of Form 2482 is the amount required to be paid under I.R.C. § 7512(b), that is, the withheld or collected taxes.
   The amount entered does not compare with the amount deposited.	Determine whether the taxpayer has violated the provisions of I.R.C. § 7512(b) and is subject to prosecution under I.R.C. § 7215 or 7402 Adversary proceedings.

5.7.2.3  (06-04-2002)

5.7.2.4  (06-04-2002)
Processing of BAL DUE Cases

1. Take the following actions on prior BAL DUEs when a Form 2481 has been delivered:

   1. Secure a collection information statement.

   2. Secure an installment agreement representing the taxpayer’s maximum ability to pay BAL DUEs.

   3. Allow sufficient funds for the taxpayer to comply with the special deposit requirements.

   4. Retain the approved installment agreement in your inventory for manual monitoring.

2. If an installment agreement cannot be secured, document the reasons why in the case file.

3. If the taxpayer is complying with the requirements of the Form 2481 and there is no installment agreement, a levy will not be made unless:

   1. It will not materially impair the taxpayer’s ability to comply with the requirements of Form 2481.

   2. It has been determined the case no longer has criminal or civil prosecution
      potential.

   3. It is in the best interest of the government.

4. Notices of Federal Tax Lien may be filed and a levy may be made only upon the concurrence of the CI Special Agent in Charge if potential criminal prosecution may be considered for a taxpayer's non-compliance with I.R.C. § 7512. . If the Special Agent in Charge does not agree with a proposed civil action, the matter should be referred to the Compliance Area Director and Director, Field Operations for resolution of the disagreement. Normal collection activity may be resumed for taxpayers upon notification from the Special Agent in Charge that the criminal aspects of the case are concluded or the case is not being accepted for prosecution, and if no civil injunction will be sought.

5. If only potential civil injunction is contemplated for a taxpayer's non-compliance with I.R.C. § 7512 requirements, then appropriate Notices of Federal Tax Lien may be filed and the taxpayer may be given the appropriate collection due process notices that follow the lien filing and precede the making of a levy. However, making a levy while a taxpayer's compliance is being monitored under I.R.C. § 7512 will ordinarily be inappropriate. If you want to levy, consult with local counsel and discuss the impact a levy may have on a potential civil injunction case..

5.7.2.5  (06-04-2002)
Referrals For Civil Enforcement

1. Taxpayers who do not meet the criteria in LEM 5, Section 4.1.(2), may be recommended for civil injunction action for failure to comply with the provisions of I.R.C. § 7512.

   Note:

   This action is normally appropriate for taxpayers with minimal or no equity, or where seizure may not resolve the problem.

2. You will:

   1. Prepare a report to Associate Area Counsel through your group manager addressing the facts of the case. Refer to the Legal Reference Guide, IRM 5.17, Chapter 4 "Suit by the United States" for guidelines.

   2. Recommend in the report that Associate Area Counsel consider instituting civil proceedings under I.R.C. § 7401 and 7402 requesting an injunction against the taxpayer to prohibit the incurrence of future unpaid trust fund tax obligations.

   3. Include copies of pertinent material, (e.g. Form 2674, Report of Trust Fund Tax Violations) from the case file.

   4. Forward to the group manager for review and approval, then submit to Technical Support Function for technical review before it is forwarded to Associate Area Counsel.

5.7.2.6  (06-04-2002)
Referrals For Criminal Enforcement

1. When a taxpayer fails to comply with the provisions of I.R.C. § 7512 and the criteria in LEM 5, Section 4.1.(2), have been met; do the following:

   1. Consult your group manager as to the appropriate course of action, which may include a referral to Criminal Investigation.

   2. If a criminal referral is appropriate, then prepare form 2797, Referral Report of Potential Fraud Cases, submit the report through appropriate channels to the Area Fraud Coordinator.

2. If the referral is accepted by Criminal Investigation, the special agent assigned to the case will contact the revenue officer.

3. From the time of referral to the Special Agent in Charge, until the criminal aspects of the case are concluded, the Compliance Area Director believes that suspension of the civil aspects will imperil ultimate collection of civil liabilities, then bring the matter to the attention of Associate Area Counsel (SB/SE). Local SB/Se Counsel will coordinate with local Criminal Tax Counsel for the POD.

5.7.2.7  (06-04-2002)
Cancellation of I.R.C. § 7512(b) Requirements

1. When you determine that a cancellation of I.R.C. § 7512(b) requirements is in order:

   1. Prepare in duplicate the cancellation notice referring to the original notice and paraphrase the language in I.R.C. § 7512(c).

      Note:

      Have the cancellation become effective as of the end of a quarter. This benefits the taxpayer and the Service.

   2. Prepare a cover memorandum setting forth the reasons for canceling the requirements.

2. Forward to your group manager for signature in civil cases, and to the Compliance Territory Manager or Area Director, as appropriate, in criminal cases.

3. The signed cancellation notice will be returned to you, through the Compliance Territory Manager and your group manager.

4. You will:

   1. Deliver or mail to the taxpayer the signed cancellation notice, along with a copy of Notice 931.

   2. Review deposit requirements and when to start the deposits with the taxpayer, either in person or by phone.

   3. Prepare Form 4844, Request for Terminal Action, to request the Filing Requirement Code be changed from "9" or "10" to "1" and TC 137 be input for future FTD Alert issuance.

   4. Request input of TC 149 to reverse the TC 148–9.

Exhibit 5.7.2.7-1  (06-04-2002)
Letter 1608(P) (eff. 12-20-81)

Exhibit 5.7.2.7-2  (06-04-2002)
Letter 2216(P) (eff. 10-30-86)